KCP LTD

KCP Ltd has 5 divisions :

1. Cement - 5 lakh tons at Macherla, Andhra Pradesh (30kms from Nagarjuna Sagar)
2. Hydropower - Small 8 mw power plant near a place called Vinukonda for captive use.
3. Engineering - Workshop at Tiruvottiyur in Chennai - 130 acres
4. Sugar subsidiary in Vietnam
5. Biotech.

Cement :

The company has reported a loss of about 2.20 crs for the first 9 months as realisations were very poor. This is due to the fact that it is present in a bad cluster. There is a lot of overcapacity in their cluster. The cement companies in that cluster got together and agreed on maintaining price discipline. The other players in this cluster are India Cements, Pennar Cement and Priyadarshini Cement. However due to the floods in Karnataka and Tamil Nadu, manufacturers like India Cements dumped their excess stock in Andhra which significantly depressed prices. The prices were between 110 - 120 a bag.
However, in the fourth quarter prices have recovered to between 130 - 140 a bag and the company should be able to recover their losses in this segment for the last 9 months. The company should report close to 100 crs revenues this year from cement. The company selles 85% in Andhra, 10% in Tamil Nadu and 5% in other states like Karnataka. The capacity utilisation is close to 100%.

Hydropower :

This plant was set up a few years ago to cut down their operating costs. However due to the erratic rainfall in the past few years, the plant was not running at optimum level. Only this year, the power plant is making a significant contribution to the profits.

Engineering :

The company operates in 5 segments :

1. Power - The company manufactures the mechanical part of power equipment like gears for turbines, spiral tubes etc.
2. Cement Machinery - The company earlier had a joint venture with the global leader in cement machinery, Fuller. It was called Fuller KCP. The company has now become a 100% sub of Fuller India. Fuller has moved its global design centre to Chennai. FL Smith has now taken over Fuller globally. Fuller does not have a manufacturing facility in India and KCP being so closely associated with them is a preferred partner. KCP manufactures the entire range of cement machinery. The main competitors are Walchandnagar Industries and Krupp India Ltd. The company has had very few orders from the cement sector for the last few years due to the lack capex. However as cement prices keep trending upwards, cement players may now begin to get tempted to get into an expansion mode again and hence KCP could be one of the biggest beneficiaries assuming Fuller bags a lot of the orders.
3. Sugar - KCP manufacuters sugar machinery like boilers. It has supplied equipment to companies like the EID group in the past. KCP's strength is in the south. However as not many south based sugar companies are expanding at the moment, the sugar order book isn't very large at the moment. If sugar prices remain strong, there could be a hughe capex in the south next year.
4. Defence equipment - KCP manufacutrers mechanical components for defence equipment. Their client base includes DRDO, ISRO etc. They have built the second rocket launhpad at Sriharikota showing what they are technically capable of. The company hopes that as more and more defence production is getting diverted to the private sector, the order book will increase.
5. General Engineering Equipmet - These are custom build applications for companies in a diverse range on industries. This contributes almost 50% of engg division sales.

The engineering order book is about 80 crs.

Sugar :

KCP holds a 66% stake in a sugar company in Vietnam. The company has a crushing capacity between 2500 to 3000 TCD. The plant has a sugar refinery. This gives KCP the flexibility to either buy cane from local farmers if the crop is good or import raw sugar and sell it domestically if there is a crop failure. Either way, KCP is hedged. For the last few years, this subsidiary has been making losses as the initial plant location was not suitable for sugarcane. The yields and recovery rate were low. Hence last year KCP dismantled the plant and moved it to a more appropriate area. This subsidiary is likely to report sales of approx 60 crs and report its first year of profits.

Biotech :

KCP has a small biotech plant in Hyderabad. The company extracts natural colours from chillies, turmeric etc and exports it to South Africa, US, Japan and other EU countries. However, the current sales are extremely low and the company is still running the biotech facility like a testing centre. They are facing practical difficulties like getting uniform quality chillies and turmeric as there cannot be a variation in the colour extracted. Hence for the moment this division is going to remain extremely small while the company tries to make the operations commercially viable. This division has a small loss.

Financials:

From very rough calculations, the company sould do a consolidated turnover of close to Rs 250 crs in FY06 with a PAT of about 16 crs. On an equity base of 12.89 crs this gives an EPS of about 12.50. At the current price of 170, it trades at 13.5 times.

Property :

KCP holds some really prime property. The corporate office is located in Egmore just off Mount Road. The company has 30 grounds of posh property. Each ground = 2400 sq feet. MICO recently sold its property located close by at about 2crs per ground. On the basis of that the land value is 60 crs.

KCP had aquired 130 acres of land in Tiruvottiyur for their Engineering workshop about 40 years ago at about 500/acre. Tiruvottiyur is a suburb of Chennai, just a few kms from Parrys Centre. When KCP aquired the property, it was an industrial belt. However, Tiruvottiyur has now reportedly developed into a middle class residential locality. According to local real estate brokers, the land is going at about 1500/sq ft. Assuming its going at 1000/sq ft, the value of that property is about 500 crs.

The total long term debt of KCP is just about 6 crs. The mkt cap at the current price is 220 crs. So, total enterprise value is abt 230 crs. However, the company has said that they don't have any plans of unlocking the land value by either selling it or developing it.

Growth Plans :

On stabilisation of cement prices, the company would like to expand its cement capacity from 5 lakh tons per annum to 7.5 lakh tons per annum. Also the company wants to increase the capacity of its engineering workshop and expand the product range it offers. Depending on how the sugar subsidiary in Vietnam performs, an expansion plan may also be developed for it.

Negative concerns :

The company is extremely conservative and does not disclose any information on their operations. They do not reveal even basic information which makes it extremely difficult to make accurate projection of their profits. Also, as the company has so far said it isn't interested in unlocking value from its land holdings, this stock may remain significantly under invested as far as funds are concerned. However there is deep value in the stock.

Fair Value Calculations :

Real Estate :

Tiruvottiyur - 56 lakh sq ft @ 1000/sq ft - Rs 560 crs
Egmore - 30 grounds @ 2 crs / ground - Rs 60 crs

Total Real Estate Value - Rs 620 crs

Cement :

5 lakh tons @ us $ 70/ton - 154 crs

Hydropower :

8 mw @ 2crs/mw - 16 crs

Sugar Subsidiary :

Estimated profit - 6 crs
KCP's share @ 66% - 4 crs
PE @ 5
Value - 20 crs

Total Value - 800 crs (This does not include the property in Hyderabad, Biotech division and Engineering division equipment)

Total enterprise value - 230 crs

Net Value - 570 crs

Net Value per share - 440
Current Price - 170